Why Oil is Good for Real Estate

Sometimes I think we forget how good things have been in the natural resources sector recently. Especially compared to other sectors.

Glancing at some data on the U.S. Home Price Index (HPI) from Lender Processing Services, I was struck by what the metric seems to be telling us about the impact of petroleum on the wider economy.

In most states, the Home Price Index is still well below the peaks that were set in 2006 and 2007. The chart below shows the most-recent index values (from May 2013) as a percentage of the peak value. Those with values approaching 100% are thus getting back to near their pre-crash highs.

You can see that in Texas and Colorado home prices have already regained their peaks. And Pennsylvania is not far off.

The interesting thing is that all three of these states have very active oil and gas sectors.

I don’t think that’s a coincidence. Oil and gas has been one of the best-performing segments of the U.S. economy. Spurred by the development of unconventional resources. And the three top states in the above graph are all big players in that movement.

If true, this shows us cost inflation is happening in resource-rich areas. Money is pouring into local economies in producing regions and driving up prices.

This doesn’t just affect homes. It also raises input costs for development and production companies. A big part of the reason why the mining business is suffering.

The petroleum sector, being larger, has been better able to handle capital inflows. But the industry is not immune to rising prices. We should be watchful for inflationary effects showing up in the financials of E&Ps.